The “Ides of March”

Trump is becoming increasingly isolated politically. He got clobbered both in his immigration restriction initiative and on his promised repeal of Obamacare…

Meanwhile, March also saw the Fed confirming our conjecture that it was “Fed up with foot dragging”. And that´s not a pretty sight. According to San Francisco Fed president John Williams:

I recently gave a talk to some business leaders back in California, and I found myself describing the Fed as an “amazingly nerdy group of people who pore over data, computer models, and statistical analysis.” So I hope you’ll take it as a compliment when I say that being here with a bunch of folks who’ve willingly given up their lunch hour to discuss economic forecasting makes me feel right at home.

Like you, I’ve attended many gatherings such as this in the years since the onset of the Great Recession. Sometime after the coffee is poured and the conversation begins, it invariably turns to where things stand with the recovery. Today, I’d like to propose we do something a little different …

With an economy at full employment, inflation nearing the Fed’s 2 percent goal, and the expansion now in its eighth year, the data have spoken and the message is clear: We’ve largely attained the hard-sought recovery we’ve been after for the past nine years.  

In light of this achievement, we need to shift the conversation from “how do we achieve a sustained recovery?” to “how do we sustain the recovery we’ve achieved?”

Then, he contradicts himself saying that that´s not the recovery they want to sustain!

I’d like to focus my remarks today on this topic of sustainable growth and to address a related question: What will it take to improve the trend line on GDP growth from the historically low pace we experienced during the recovery?”

William´s ramblings about “recovery” can be easily understood by looking at the chart below:

Easy to see that the hard sought recovery has “been largely attained” only because the “goalposts” have been moved. Instead of actual output recovering to the level of potential output, it is the level of potential that comes down to meet actual!

Williams concludes:

As I wrap up, I must say that, although it’s always wonderful to talk with you, I much prefer being able to do so in light of more than seven years of economic expansion, inflation near 2 percent, and a new normal for unemployment which thankfully looks a lot like the old, pre-recession normal.

Again, Williams appeals to numbers without any context. Inflation of the headline variety is up because of oil prices.

However, that won´t last because oil stopped rising some months ago and going forward year-on-year oil price changes will trend down.

As can be ascertained, the core measure, which better reflects the trend in inflation, is at the same level today that it was three years ago.

The “new normal for unemployment looking like the old” is the epitome of “fake news”. The chart indicates that the low rate of unemployment today means something very different from what it did 20 years ago. If you crunch the participation rate, you lower unemployment, but that´s far from being a sign of a healthy economy.

Moving on, there are influential outsiders like Harvard´s Martin Feldstein who see that the risks to a booming economy in the present lie in mistaken policies of the past:

After a long and slow recovery from the recession that began a decade ago, the United States economy is now booming. The labor market is at full employment, the inflation rate is rising, and households are optimistic. Manufacturing firms and homebuilders are benefiting from increasing activity. The economy is poised for stronger growth in the year ahead. We no longer hear worries about secular stagnation.

But, although the economy currently is healthy, it is also fragile. The US has experienced a decade of excessively low interest rates, which have caused investors and lenders to seek higher yields by bidding up the prices of all types of assets and making risky loans. The danger is that overpriced assets and high-risk loans could lose value and cause an economic downturn.

But a bad outcome is not inevitable. None of the risks I have described may materialize. Interest rates may return to normal levels, and asset prices may gradually correct. But there is a clear risk that a decade of excessively low interest rates will cause a collapse of asset prices and an economic downturn. This will be a major challenge to the US Federal Reserve and the Trump administration in the year ahead.

Put this way, luck is the only thing that will save the economy from disaster!

During March, asset prices and yields did not move a great deal, but the general direction was down after the FOMC Meeting in mid-month.

The Fed´s tightening bias will become stronger going forward given the “favorable” numbers of their inflation-employment mandate. It is, therefore, unlikely “luck” will be forthcoming.


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